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Private lenders including Apollo and Ares have been stepping in to prop up corporate bond deals in public markets as other investors back away amid volatility that has crushed the volume of riskier debt sales this year.
Ares Management provided $2bn of the debt to back Brookfield and Elliott Investment’s $16bn buyout of consumer data company Nielsen Holdings in April, after plans to go entirely to the public bond market came unstuck, according to people familiar with the deal.
Brookfield is also borrowing nearly $900mn from Goldman Sachs Asset Management’s private credit arm for its roughly $8bn acquisition of software company CDK Global, according to people briefed on that transaction.
The uptick in so-called hybrid deals, where financing is sourced from both private and public markets, comes as more traditional asset managers have become more wary about buying corporate bonds. These money managers are suffering large withdrawals from their funds as investors respond to the Federal Reserve’s aim to tighten financial conditions by withdrawing their cash.
The dip in demand has contributed to a chill in the issuance of high-yield bonds this year, leaving an opening for private lenders to step in and provide cash on terms less contingent on near-term price swings.
The flurry of deals also underscores the growing power of private lenders that are typically units of buyout groups and alternative money managers. Their assets have swelled to around $1.2tn after growing at a double-digit rate annually over the past decade, according to data provider Preqin, as investors ploughed capital into funds in a hunt for yield
The Nielsen and CDK deals come after Apollo salvaged a bumper debt offering from Carvana, the online car dealer, last month. The private lender proposed a reworked deal and committed nearly half of the $3.28bn raised by the company after its original, smaller bond offering struggled to attract investor demand.
“When the high-yield market shuts down . . . the private markets have to come in for support,” said Kipp deVeer, who heads the Ares Credit Group. “We benefit from the volatility because we are able to step in and work with companies we like.”
The shift is most evident in large leveraged buyouts and deals for technology companies with valuations predicated on rapid growth, which have come under pressure as the Fed has started raising rates.
Private lenders say they are better positioned to step in and provide financing while markets remain choppy because the capital they have to put to work is locked up and cannot be withdrawn as quickly as it can from typical mutual funds.
Although private lenders tend to charge higher interest rates than corporate borrowers would typically pay bondholders, they say they offer companies a chance to secure funds with certainty in volatile markets.
“For private credit, it’s a fantastic opportunity to deploy capital quickly,” said John McClain, a high-yield bond manager at Brandywine Global.
Some of the companies that private lenders are financing are struggling, McClain added, meaning their creditors “will be sweating for a while”. But he said the long lock-up structure of private credit funds meant they would have “time to work through the issues”.
The number of new private debt funds raising cash has eased from the breakneck pace seen over the past year. But the average amount being raised by each new fund more than doubled in the first quarter of this year compared with the same period of 2021, according to data provider Preqin, in a sign of the growing firepower some funds are able to deploy.
The potential blockbuster takeover of Twitter by Elon Musk could add to the list of hybrid deals, with financing expected to come from a mix of syndicated debt as well as private lenders.
Apollo is also working with bankers to provide a slug of the debt for the $16.5bn takeover of Citrix Systems by Vista Equity Partners and Evergreen Coast Capital, according to people familiar with the deal.
“The depth of the market is simply not there right now for these large financings,” said Zito. “Companies and banks are starting to look at hybrid solutions between public and private lenders. You need to access all parts of the market to get these large deals done.”
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